Prepaid Card Competition Is Bringing Down Fees

Large banks are entering the prepaid debit card market and helping drive down fees.

Big national and regional banks are also making fees less complicated by offering low, fixed monthly costs, says Greg McBride, senior financial analyst at Bankrate.com, which released a survey of prepaid debit cards today.

The survey found that 13% of issuers, mainly large banks, charge a single monthly fee of $4.95 to $7, says Bankrate.com.

That’s a better deal than most prepaid debit cards, which have have nickel-and-dimed consumers with a hodgepodge of fees that include such things as fees for enrollment, ATM withdrawals and balance inquiries. The charges can add up quickly.

For example, 63% of issuers charge monthly service fees that range from $3 to $9.95, according to Bankrate.com’s survey of 24 widely issued prepaid debit cards.

The issuers generally add other charges to the service fees, such as ATM withdrawal fees or balance-inquiry fees. The monthly cost is generally more than $20 a month for a consumer making 10 purchases per month, four bill payments, one customer service call, one out-of-network ATM withdrawal and a balance inquiry at the ATM, according to Bankrate.com’s 2012 study.

About half of those who have a service fee will waive or reduce the fee if consumers meet certain requirements. None of the issuers in the survey currently charge fees for reloading the cards, and very few of them charge bill-payment fees.

Consumers clearly need to shop around before they select a prepaid card. “It can be confusing because of the variety of fees,” says Bill Hardekopf, CEO of LowCards.com.”It’s very important for consumers to read the terms and conditions of the different cards they are considering. They should compare the fees based on how they expect to use the card.”

Competition from big banks and credit card issuers, such as Chase and American Express, is one reason low-cost, flat-fee cards are appearing. Issuers also may be lowering and simplifying fees because the Consumer Financial Protection Bureau has said that it is considering new consumer protections for prepaid cards.

Issuers are also willing to lower consumer fees because prepaid debit card usage can generate income and help fill in the revenue gap on existing debit cards, McBride says. When the Durbin Amendment took effect in 2011, it put limits on debit card interchange fees, which were paid by merchants.

Because prepaid cards are not subject to the Durbin Amendment, they’re gaining more favor among large banks. They are also a way for banks to reach customers who are not currently being served, McBride says.